Reviewed by Roha Suhail Qureshi and Ajwah Nadeem.
Dr. Mujtaba Piracha was ideally suited to pen the first-of-its-kind detailed analysis exploring Punjab’s chronic woes of low property tax revenue. He has not only been Pakistan’s ambassador to the WTO but a member of the Punjab Revenue Authority. This book busts several myths about taxation, and shows the downsides of decentralization, arguing its limited benefits in an unsupportive political structure.
The arguments in the book are deeply multifaceted, going well beyond the typical academic analysis of linking low taxation to governments lacking political will, a centralized system, frequent changes in tax leadership, and implementation capacity. Dr. Piracha particularly looks at property taxes since their revenue is significantly lesser even when compared to other taxes; donor-supported initiatives to fix it fail repeatedly and therefore, reasons in addition to those of low taxation generally affect it. Other factors rendering property taxes of unique interest are: it is not at risk of asset flight, is progressive, provides relatively stable income since property values change slowly, and is channeled back into the local government’s municipal services.
This book upends the typical argument about decentralization leading to greater tax revenue and fully examines the extent to which informality seeps into government handlings, making it inefficient. It leads to one conclusion: without fixing the entire governance system and structure, these solutions are counter-productive.
For this book, Dr. Piracha studied detailed government records and took part in field studies, leveraging his role as a civil service officer to gain insight that would otherwise not be possible. His research findings revolve around three core reasons for exceptionally low property tax revenue.
The first reason is the failure of subnational governments to cooperate. This argument makes it clear that it is a policy problem at its heart: the revenue and responsibilities of the three levels of subnational governments are mismatched, leading to disincentives for each level to cooperate in collecting property tax.
He goes on to argue that the responsibilities are divided among the three levels of government, while revenues are only shared between two levels, creating organizational disincentives. Town level governments enjoy most of the revenue, district-level receive none while the remaining little amount goes to provincial governments. Perversely, the responsibility to supervise tax staff, fund operation costs, and review public appeals against assessment falls to the provincial government.
A testament to the author’s commitment to a nuanced, holistic overview, Dr. Piracha doesn’t fail to point out the role of repeated military governments’ attempts to empower local governments to undermine provincial governments. It has shaped a long history of rivalry, detrimentally affecting cooperation between different departments.
Secondly, Dr. Piracha argues that a low fiscal equilibrium plays its part too: there is a lack of incentives to raise taxes and expenditures. Low-level governments are highly reliant on transfers from higher levels of government and loans to manage expenditure. Provincial governments rely on federal revenue, and so relying on property tax becomes insignificant and its potential remains lost.
The author further argues that the prevalence of patronage politics and the alienation of the wealthy from the abysmal quality of public services means that the demand to improve them remains chronic, but never gathers enough momentum needed to be treated seriously enough to incentivize tax revenue collection. During times of fiscal stress, the government spends effort on paying its employees rather than maintaining public services.
Consequently, budgeting becomes central to the tax revenue problem too. Civil society plays a significant role in regularly analyzing provincial and federal budgets. For instance under the PILDAT initiativ, which however, is restricted to the annual budget only. So the question arises: How can we initiate policies or spread awareness amongst the general public and political elites about these services and the need for efficient tax collection?
The third core argument is weak tax administration. Predictably enough, the control of detailed information at the lowest levels, combined with an essentially patronage-based informal political economy, breeds corruption. The taxation policy has enough loopholes to make it quite easy: there are large tax differentials between owner occupied, rent occupied, commercial and residential properties. Lower-level staff monopolize information and- here, Dr. Piracha digresses from the mainstream rhetoric-not only for corruption. It is to create a buffer for periods when they face pressure for more tax collection, and to fund the cost of tax collection, an expense they get repeatedly inadequate funding for. In his book Dr. Piracha explores in detail the motivations of tax collectors at different levels, demystifying the typically reductive economic argument.
To conclude, the book highlights a broader disconnect between the state and its citizens and counters the ever-pervasive support for local governments by pointing out nuances that should be taken into consideration. It balances the macro and micro expertly, keeping the readers’ attention. It is worth a read for future policymakers, civil servants, and anyone interested in challenging their preconceived notions on governance and taxation.
Piracha, M. M. (2022). Property taxes and state incapacity in Pakistan. Oxford University Press.